Taiwan Semiconductor Manufacturing Company, the world’s largest contract chip maker, is facing a challenge from mainland China, which has set up a 120 billion yuan fund to support the country's semiconductor industry. Photo: Bloomberg

China attacks Taiwan’s strategic companies

In June, four Chinese government agencies announced the creation of a 120 billion yuan (US$19.53 billion) fund to support the country’s semiconductor industry. If successful, the move could spell economic disaster for Taiwan Semiconductor Manufacturing Company (TMSC), the world’s largest contract chip maker.

“This is the most powerful and most flexible initiative in China’s history to back its semiconductor industry,” said Nicky Lu, managing director of the Taiwan Semiconductor Industry Association.

This is one of the few sectors in which Taiwan still has a competitive advantage over its mainland rivals. Another under threat is petrochemicals.

The Jiangsu Hengli Chemical Fibre Group has the world’s largest capacity to produce polyester yarn. A new plant it has built in Dalian turns out 10,000 tons a day of PTA (purified terephthalic acid), which accounts for 18 percent of all plastic materials. The husband and wife team who set up Hengli regard as their idol Wang Yong-ching, founder of Formosa Plastics and the most successful businessman in Taiwan since 1945.

Taiwanese companies are under threat from mainland competitors, heavily funded and supported by the government and state banks, than ever before.

In the first half of this year, Taiwan exports to China fell 10.2 percent from a year earlier and its share of China’s import market has fallen from a peak of 12.9 percent in 2002 to 7.15 percent.

In a speech before more than 400 Taiwan business leaders in Beijing on Sept. 12, Yu Zhengsheng, a member of the Standing Committee of the Communist Party’s Politburo, said people of Taiwan should not fear that the mainland would “swallow” the island. But that is exactly what they are afraid of.

Semiconductors are a good example. China became the world’s largest consumer of integrated circuits 10 years ago but remains heavily dependent on imports. IC Insights, a market research company, estimates that China will remain dependent on imports for 70-80 percent of its needs in 2017.

The three manufacturers of the most advanced chips are TMSC, Samsung and Intel. The new government fund is intended to provide economies of scale, technology and a flexible supply chain to break this dependence and cultivate domestic producers.

Will Taiwan’s historic advantages – highly educated engineers, creativity and a strong system of protecting intellectual property – be sufficient to save this pillar industry?

Its steel, petrochemical and solar panel companies are also under threat because of the enormous overcapacity in these sectors on the mainland.

As recently as three years ago, China used to import up to 30 percent of its upstream petrochemical materials from Taiwan – but no longer. According to figures from Taiwan’s Economics Ministry, total exports of PTA in 2011 were NT$108.1 billion (US$3.59 billion), one of the island’s top 10 exports, after solar-powered batteries. By 2013, this figure fell to NT$15.9 billion.

China’s production capacity of PTA has risen more than 60 percent in the last two years; there is now a surplus and no need to import.

The case of Chen Jianhua, 43, chairman of Hengli Group, is alarming for Taiwan. After training in the cement industry, he acquired a bankrupt state textile yarn factory 20 years ago. He bought large quantities from Taiwan producers like Nan Ya and Yuan Dong and imported PTA from the island.

In 2010, he became the first private company to win Beijing’s approval to invest in PTA production. In 2012, he invested in a plant with annual PTA production of 6.6 million tons, a third of it for his own use and the rest for sale in China and overseas. Hengli’s sales last year reached 135 billion yuan, ranking 11th among private companies in China and making Chen and his wife No. 85 among the country’s richest people, worth 9.1 billion yuan.

At his headquarters in Wujiang, Jiangsu are photographs of him with national leaders like Xi Jinping, Li Keqiang and Wen Jiabao.

“Only PTA companies with output of at least one million tons a year will survive. If you do not reach that level, the market will kill you. It is without mercy,” he said. The two largest producers in Taiwan, Chong Mei and Tai Chong, each have annual output of 700,000 tons.

This unprecedented and rapid increase in production capacity in PTA and other products in China has taken Taiwan companies by surprise. Much of it is due to the trillions of yuan injected by Beijing after the 2008 financial crisis, which permitted high levels of investment and import substitution.

In the face of such competition, what is the future of Taiwan companies in these sectors?